Working Paper

Title: An Econometric Estimation of Locational Choices of Foreign Direct Investment: The Case of Hong Kong and U.S. Firms in China

Reference Number: 1051

Publication Date: December 2002

Author(s):

K.C. Fung and Hitomi IizakaUniversity of California, Santa Cruz

Chelsea LinNational Dong Hwa University

Alan SiuThe University of Hong Kong

Abstract:This paper examines the locational choices of Hong Kong and U.S. direct investments (DI) in China using a regional data set from 1990 to 1999. The results of the panel regressions show that there are various similarities and differences in the significance and the magnitudes of the determinants of DI between these two sources. Local GDP significantly affects the inflows of both types of investments, but U.S. investment is more sensitive to local demand. The lagged wage variable negatively affects both Hong Kong and U.S. investment, but Hong Kong investment is more sensitive to local labor cost. A rise in regional labor quality raises both investment inflows, but the quality index exerts a stronger influence on U.S. investment. These econometric estimates can be understood in light of two stylized facts of U.S. and Hong Kong investments in China. First, the motive of U.S. firms investing in China is primarily to sell in China, whereas Hong Kong firms tend to invest in China to take advantage of the low labor costs and then to export. Second, U.S. investments in China tend to be more capital- and skilled- intensive than those from Hong Kong.